Bank Indonesia governor Perry Warjiyo reacts before a media briefing at Bank Indonesia headquarters in Jakarta, Friday (29/06). (Reuters Photo/Willy Kurniawan)

Bank Indonesia Aggressively Raises Rates to Defend Rupiah

JUNE 29, 2018

Updated at 7.04 p.m.

Jakarta. Indonesia's central bank on Friday (29/06) raised its benchmark rate by twice as much as the market expected, becoming the most hawkish Asian central bank as it ramps up efforts to defend the volatile rupiah and stem a sell-off washing across emerging markets.

Bank Indonesia (BI) hiked the seven-day reverse repo rate by 50 basis points (bps) to 5.25 percent. A Reuters poll projected a 25 bps increase.

Friday's hike was Indonesia's third in six weeks and comes as more vulnerable markets saw a sell-off intensify this week on a range of factors from rising oil prices to a trade war embroiling China, the United States and other leading economies.

"The decision on interest rates is a continuation of BI's pre-emptive and front-loading [strategy] in keeping the competitiveness of the domestic financial market," governor Perry Warjiyo told reporters.

The governor of BI, which has now outpaced the two hikes by the Philippines and one by India, also said he expected the 50 bps increase "will attract inflows, especially in fixed income. The inflow through government bonds should raise dollar supply and support rupiah stability."

Still, Perry said, the central bank will continue to intervene in forex and bond markets to help prop up the rupiah.

Gareth Leather of Capital Economics said Friday's rate increase is unlikely to be the last as "the two main factors responsible for the slide in the rupiah – rising risk aversion and treasury yields – look set to continue for a while longer."

Will This Be Enough?

In ANZ's view, "whether Friday's aggressive decision will be enough depends on the broader global environment. At this point, BI will likely remain highly responsive to market volatility."

In 2016 and 2017, BI cut its benchmark rate a total of 200 bps in a bid to boost sluggish lending and economic growth.

It has now raised the benchmark rate 1 percentage point in six weeks.

After the second of two May hikes, the rupiah recovered to 13,830 per dollar, but then fell again.

On Friday, just before the BI announcement, the currency was at 14,410 — a two and a half-year low — and it strengthened to 14,300 afterward.

The rupiah has been rattled by expectations of higher US interest rates and oil prices, plus worries about global trade and growth.

The currency is among the worst performers among Asian units this year, after the Indian rupee and Filipino peso, losing around 5.8 percent against the dollar.

Relaxing Mortgage Rules 

After Friday's increase, 10-year government bond yields remained quoted at 7.816 percent, around the lowest since January 2017.

In April and May, Southeast Asia's largest economy saw about $1.75 billion leave its sovereign bond markets as foreign investors reviewed exposure to higher-yielding emerging markets. There was an inflow of about $36 million this month, as foreign ownership of government debt dipped to around 38 percent from nearly 40 percent.

In the stock market, foreigners have been net sellers of nearly $3.5 billion of Indonesian shares this year.

Also on Friday, in a bid to spur more lending for housing, BI eased down payment requirements for mortgage loans.

The central bank will remove the roughly 15 percent down payment it required for first-time home buyers, as well as ease a rule preventing the use of bank loans to fund partially-built houses.

"Property is one of the leading sectors that can support the economy, and has a multiplier effect," said Perry.

David Sumual, an economist at Bank Central Asia, said the move will help meet demand for real estate that is there "as long as the purchasing power is maintained. But it takes time. The effect will be seen at the end of this year."

Sluggish consumption has constricted Indonesian economic growth, and higher lending rates could make a further dent. But BI kept its 2018 growth forecast at 5.1—5.5 percent.

Additional reporting by Tabita Diela